Markets recover as fears of imminent trade war recede

Equity markets across Emerging Asia have bounced back a little since early April as fears of an imminent trade war between the US and China have receded. The decision by the US Treasury not to label any country in the region a currency manipulator, Donald Trump’s conciliatory response to the recent offer by Xi Jinping to accelerate the opening up of China’s economy, as well as the decision to renegotiate, rather than abandon, the US-Korea free-trade agreement, have all helped to soothe investors’ concerns. Of course it is too soon to sound the all clear, and because of China’s large (and growing) bilateral surplus with the US, relations are likely to remain tense for a while. However, given Trump’s track record, which has seen him back down from previous protectionist threats, such as to declare China a currency manipulator on his first day in office, or to pull out of NAFTA, we remain of the view that negotiations will eventually win out over an all-out trade war with China. (See our Global Economics Update, “Is it time to worry about a trade war?”, 6th April.)